At dusk in this factory city, just ahead of the Lunar New Year, neighbors chitchat on the street, brimming with news of more factory closures and rumors of layoffs to come. Some women walk home in groups, while others head out for their night shift.

The workers who powered China's meteoric rise as the world's factory are under pressures few could have imagined just a year ago. Conditions were often difficult and vacations short, but workers could thrive relative to peasants in the countryside – and send money home.

Now, the global recession is shuttering manufacturers and pushing millions of laborers out of work or into lower wages. Chinese leaders are struggling to balance the desire to help workers quickly with the need to avoid damaging long-term growth by rescuing failing industries or building bridges to nowhere. And they're keeping a keen eye on stability in a society where the gaps between haves and have-nots has widened sharply.

"In this coming year, especially in the [first half], China is facing the biggest challenge it's faced certainly for 20 years," says Kenneth Lieberthal, a China expert at the Brookings Institution in Washington.

Layoffs' ripple effects

China's economic growth slowed to a seven-year low of 6.8 percent last quarter, dragging 2008 growth down to 9 percent, from 13 percent the year before.

In Dongguan's "Sweater Town," where blocks upon blocks of knitting factories form a squat skyline, streets are emptier these days, says a factory boss. Many shops have shut for the holiday – or for good.

Even migrants with jobs are hurting, as bosses cut salaries and overtime from a modest average wage of less than 1,000 yuan ($150) a month, says Liu Kaiming, director of the Shenzhen-based Institute of Contemporary Observation (ICO). The losses are rippling down to migrant shopkeepers who cater to them, and to workers' families, who rely on remittances.

There's hope that migrants will return to the cities to look for work after the holiday, says Mr. Lieberthal. That's when the extent of layoffs and wage cuts will become clearer.

Meanwhile, the government is concerned that frustrated migrants will stir social unrest. They are "very pessimistic about the economy," and demonstrations often break out, says Zhang Zhiru, whose fluorescent-lit legal aid center in Shenzhen receives clients late into the evening.

But the prospect of major upheaval seems dim, if only because officials have learned how to nip protests in the bud, says Joseph Fewsmith, an expert on Chinese politics at Boston University.

"The government is pretty good at figuring out how to stanch the problem, which is frequently [by] a combination of giving in to some demands and cracking down on the people who seem to be the so-called ringleaders," he explains. This strategy works better with "bread and butter" demands, which are easier to meet than ideological ones.

The government has survived mass layoffs before. In the 1990s, China shed 50 million jobs amid relative stability as many state-owned enterprises closed. Today's migrant workers, by comparison, "are younger and more mobile. So the task of maintaining social order seems easier," Mr. Fewsmith says.

To start, the authorities are tackling immediate grievances like unpaid wages. Labor disputes have multiplied as bankrupt factory bosses skip town before payday. Local officials then help to pay arrears.

Zhou Chunxiang, from Hunan Province, says the Shenzhen government readily paid her and her peers' back pay. She hasn't found work since her DVD factory shuttered last November, but will look again after going home for the New Year, the young woman said recently as she sat at the train station, surrounded by her luggage and thousands of village-bound migrants.

But many such wrongs aren't righted. Shenzhen, whose government is required by law to provide back pay for failed factories and has one of the best track records, is covering only about 80 percent of what's owed, says Mr. Liu.

To help preserve jobs, Beijing this month decided to prop up low-profit, high-polluting factories, which it has sought for years to close, by reinstating an export rebate tax that helps them cut costs.

In some places, labor reforms – which protected workers but also raised costs – seem to have taken a back seat. Mr. Zhang and others say officials have grown more lax about enforcing 2008 laws that strengthened rules on contracts and social-security payments. "They don't say you don't have to follow the labor laws, but now it's 'one eye open, one eye shut,' " says a manager of a 700-employee textiles factory in Dongguan.

One option Beijing has floated is to build a social safety net for migrant workers by spending part of a 4 trillion yuan ($586 billion) stimulus package announced last November on social security, healthcare, and education. Last Wednesday, it announced a $123 billion plan to provide universal healthcare by 2011.

These measures would free workers from having to save for those services. They might also help fuel domestic consumption, which Beijing has tried to boost to counter falling foreign demand.

Quick-hit projects

Much of the stimulus, though, is earmarked for job-creating infrastructure projects such as roads and power plants.

The central government would like to launch green projects that move China toward a more energy-efficient economy, such as improving the electrical grid and investing in mass-transit systems, Lieberthal says.

But with local governments pressed to create jobs fast, they may resort to quick projects that may be ill-conceived.

Meanwhile, migrants are looking for jobs available now, even ones paying half their previous salaries.

Ms. Ma, who just lost her job as a cashier, says she's going back to Henan Province indefinitely. "I will ask my friends there about work," says the young woman, who left home just a year ago.

Nine out of 10 migrants find jobs through word of mouth from fellow villagers, and Chinese New Year is the best time to swap information about different cities and factories, says Liu, of ICO.

This village grapevine will shape China's migrant workforce in the coming months. But it has flaws. Based on what they hear, "many people will move from Guangdong to Jiangsu and Shanghai, and many people will move from Jiangsu and Shanghai to Guangdong," Liu sighs.